Equities pause ahead of Janet Yellen

by
Timothy Moore

Global investors are fixed to the sidelines as they await a speech by US Federal Reserve chair Janet Yellen at a key annual gathering of central bankers in Jackson Hole, Wyoming. ASX futures flat. $A little changed.

The frenetic pace of local reporting season concludes today with Qantas among others.

While investors may be looking for a trading advantage from Yellen, strategist have low expectations.

“She may signal more clearly that the Fed will announce the start of balance sheet normalisation at the upcoming September FOMC meeting, but that outcome is by now almost universally expected,” said Capital Economics’ Andrew Hunter. “She is unlikely to give any strong hints on the timing of the next rate hike.”

Increasing market scepticism of Fed hiking cycle

TD Securities

That said there are still expectations that the Fed will continue to edge rate higher.

“With more downside risks to the inflation outlook, we expect three Fed hikes between now and the end of 2018 — a trim from our prior call for four hikes over that period,” according to TD Securities. “We continue to expect the FOMC (the Fed’s policy making committee) will announce plans to scale back its reinvestment program in September.

“Our base case is for another 25bp rate hike this December, but we see a significantly elevated chance that the Fed will delay the next rate hike until early 2018. Continued low inflation, softer activity data, elevated market stress, or geopolitical shocks would increase the odds of such a delay.

“Similar outcomes also could slow the hiking cycle next year, but on net we see risks skewed to the upside .. each could quicken the pace of 2018 rate hikes. The composition of FOMC voters next year is more hawkish as well.”

United States

“Investors are reluctant to get too far out on their skis in terms of buying stocks,” said Rick Meckler, president of hedge fund LibertyView Capital Management LLC in Jersey City, New Jersey. “Rallies are not extending the way they had when people had more confidence that the Trump agenda, particularly tax cuts, would be passed.”

In a post on Twitter, Trump said Congress could have avoided a legislative “mess” if they had heeded his advice on raising the amount of money the government can borrow, known as the debt ceiling.

A late-September deadline looms for U.S. officials to raise the debt ceiling or risk defaulting on debt payments, leading investors to anticipate a volatile month, said Michael Purves, chief global strategist and head of equity derivatives research at Weeden & Co in Greenwich, Connecticut.

“Why would you rush to buy this dip with the debt ceiling looming?” Purves said.

The number of Americans filing for unemployment benefits was less than estimated last week and near a four-decade low, indicating the job market remains tight, Labor Department data showed.

Europe

Gains by cyclical sectors helped push European stocks higher on Thursday while heavy losses in Dixons Carphone after a profit warning dominated trading.

The pan-European STOXX 600 was up 0.2 per cent at its close, in line with euro zone stocks and blue chips .

Dixons Carphone shares plummeted as much as 29 per cent after the mobile phone retailer downgraded expectations for full-year profit, reflecting tougher conditions in the mobile market as customers hold on to handsets for longer.

The company earnings season in Europe is drawing to a close, with almost 90 per cent of MSCI Europe firms having reported. So far, 55 per cent have beaten forecasts and 39 per cent have missed.

Asia

Hong Kong stocks followed Asian markets higher and rose for the third session in a row on Thursday, underpinned by robust gains in financial and property stocks. The market resumed trading after a one-day closure for a strong typhoon.

The Hang Seng index rose 0.4 per cent, to 27,518.60, while the China Enterprises Index gained 0.9 per cent, to 11,051.00 points.

Investors were also cautious as the Shanghai benchmark neared the 3,300-point-mark, a level that has proven to be a stiff hurdle with three failed attempts to breach it over the past nine months.

The blue-chip CSI300 index fell 0.6 per cent, to 3734.65, while the Shanghai Composite Index lost 0.5 per cent to 3271.51 points.

After a calmer morning session, sentiment soured as China Unicom extended its losses in afternoon trading, down nearly 7 per cent at close.

Japan’s Nikkei share average fell to a 3-1/2-month low on Thursday, dragged down by Wall Street losses, a stronger yen and steel makers after reports that the country’s biggest producer was cutting prices.

Bucking gains elsewhere in Asia, the Nikkei ended the session 0.4 per cent lower at 19,353.77 points. It slid to 19,351.92 at one point, its lowest since May 2.

The broader Topix shed 0.5 per cent to 1592.20.

Currencies

The US dollar edged higher after another politically driven slide against the euro and yen in the previous session, as investors shifted focus away from government tension in Washington to an upcoming global central bankers’ gathering.

The dollar has dropped 14 per cent against the euro this year, driven by a collapse in expectations for tax cuts and other pro-growth moves by the administration of President Trump that has weakened the case for further rises in US interest rates.

“Today’s data will do little to shift the market’s bearish view of the dollar at present,” said Dennis de Jong, managing director at online FX broker UFX.com in Limassol, Cyprus.

TD Securities on US bond yields: “We revise our US rates forecasts lower — we now expect the 10yr to reach 2.50 per cent and 2.75 per cent at the end of 2017 and 2018, respectively. This compares with our previous forecast of 2.80 per cent and 3.3 per cent, respectively.”

The securities firm said the reasons for the change include a “lower probability of fiscal easing”, which removes the upside risk to growth and Treasury deficits as well as lower inflation readings and a “somewhat less hawkish” ECB stance given the weaker inflation outlook.

Still, TD Securities said it sees a continual, albeit gradual, rise in US interest rates.

Commodities

Copper rose to a near three-year high on signs of stronger demand in China while inventories fell in London warehouses.

Benchmark copper on the London Metal Exchange (LME) closed 1.9 per cent higher at $US6688 per tonne, having earlier touched $US6731.50, its highest since November 2014.

“There is clear indication that Chinese demand for metals is still pretty strong and copper is no exception,” ETF Securities analyst Nitesh Shah said. “The fundamentals of copper justify these levels given how weak prices have been over the last few years. But I wouldn’t be surprised if there was a sharp pull back as there has been lots of price appreciation over a short space of time.”

OZ Minerals Ltd said it would begin construction of its Carrapateena copper mine in Australia, the country’s largest undeveloped copper project, which it estimated would cost $916 million.

The LME base metals complex marked its highest level since the last quarter of 2014, SP Angel analyst John Meyer said.

China aluminium futures rose to their highest in more than five years on Thursday while prices in London rose 0.4 per cent to $US2106.

South32 Ltd posted an eight-fold rise in its annual underlying earnings on Thursday, as a broad recovery in metal prices offset disruptions to its coal business.

Diversified miner Vedanta Resources’ first-quarter core earnings rose about 48 per cent on higher zinc production, with renewed demand for the metal driven by higher steel production in China.

Lead slipped 0.8 per cent to $US2357 tonnes, tin fell by 0.2 per cent to $US20,490, zinc rose 0.8 per cent at $US3120 while nickel was 0.7 per cent higher at $US11,745.

Australian Sharemarket

The ASX overcame a shaky start as miners again propelled the bourse to gains on another day of dramatic reactions to earnings results.

The S&P/ASX 200 index ended the session up 8 points to 5745. The benchmark measure has been trading in a 100-point band since May, while US markets have been also struggling to break out of their narrow ranges.